Mixed Bundling in Two-Sided Markets: Theory and Evidence

We extend the traditional literature on bundling and the burgeoning literature on two-sided markets by presenting a theoretical monopoly model of mixed bundling in the context of the portable video game console market--a prototypical two-sided market. It is shown that the monopoly platform's dominant strategy is to offer a mixed bundle rather than pure bundle or no bundle. Deviating from both traditional bundling literature and standard two-sided markets literature, we …find that, under mixed bundling, both the standalone console price on the consumer side and the royalty fee on the game developer side are lower than their counter- parts under independent pricing equilibrium. In our setting, mixed bundling acts as a price discrimination tool segmenting the market more efficiently as well as functions as a coordination device helping solve "the chicken or the egg" problem in two-sided markets. After theoretically evaluating the impact mixed bundling has on prices and welfare, we further test the model predictions with new data from the portable video game console market in the early to middle 2000s, during which Nintendo was a monopolist. We employ a reduced-form approach similar to Jin and Rysman (2009), and …find empirical support for all theoretical predictions.